From Principles to Practice: Israel’s Blended Finance Moment
The Israel Forum for Impact Investment (IFIE) deserves credit for advancing the conversation on blended finance in Israel in their recent report on Blended Finance in Israel.Their report provides a valuable foundation—explaining what blended finance is, how it has mobilized capital for development internationally, and why Israel should pay attention. This is important groundwork. But a question lingers: twenty years into this effort, why hasn’t Israel developed the capital market infrastructure to deploy these solutions at scale?
The Promise of Blended Finance
Globally, blended finance has unlocked over $200 billion for development by strategically combining philanthropic, government, and private capital. Sustainable finance utiliziing outcomes-based capital structures have led to over $3 trillion in structured credit and bonds according to the International Capital Markets Association. These models work by using catalytic capital—grants, guarantees, first-loss positions and performance-based incentives—to de-risk investments and attract commercial investors who would otherwise stay on the sidelines. From renewable energy in emerging markets to affordable housing in developed economies, blended structures and sustainable finance have proven their versatility.
Israel, despite its innovation economy, has largely watched from the sidelines. This isn’t for lack of need. Persistent market failures in early-stage cleantech, social infrastructure, and Arab-sector SME finance continue to constrain economic potential. Development challenges in the Negev and Northern Galilee—now compounded by war damage—demand creative and sustainable financing solutions for an inclusive economy that could reweave social cohesion in this troubled Land. The economic integration of Arab and ultra-Orthodox communities remains stalled, partly for want of patient capital willing to accept below-market returns for social impact while enabling a scalable structured credit solution. While limited budget dollars for post-recovery are allocated on an unleveraged basis, economic growth and recovery in North and South of Israel fall further behind.
The Twenty-Year Bottleneck
The candid acknowledgment by the Bank of Israel that financial regulators have pursued these reforms for more than two decades speaks volumes. Consider the securitization saga alone: announced by the Israel Securities Authority in 2005, advanced by inter-ministerial principles in November 2015, drafted into legislation in 2023 modeled on the EU’s ‘simple, transparent, and standard’ framework, and finally published as a Proposed Law in the Official Gazette on February 18, 2025. Yet industry observers expect another one to two years before enactment.
Two decades to enable a basic capital markets tool that most developed economies take for granted. The culprit isn’t technical complexity—it’s coordination failure. The Bank of Israel, Ministry of Finance, Ministry of Justice, Tax Authority, Israel Securities Authority, and Capital Market Authority each hold pieces of the puzzle. Each agency’s deliberations are reasonable in isolation; together, they produce paralysis.
Without securitization and structured credit in both public and private capital markets, Israel cannot efficiently pool and tranche risk across asset classes. Without pooling, blended structures that combine concessional and commercial capital remain prohibitively complex and expensive to construct. The absence of this financial infrastructure limits our ability to respond to urgent demands: post-war reconstruction in the North and South, climate transition, energy addition, financing, affordable housing, and enterprise development in underserved communities.
From Principles to Implementation
Reports and principles are necessary but insufficient. After two decades, the question is no longer whether Israel should embrace blended finance, but how to break the coordination gridlock that prevents it. Several concrete steps would accelerate progress:
First, expedite securitization legislation supporting structured credit and new hybrid securities. The current timeline of one to two additional years is unacceptable given the urgency of post-war recovery. The Ministry of Finance should establish an expedited track, perhaps through economic emergency provisions, to enable basic structured debt, equity and hybrid securities within twelve months. This single reform would unlock significant downstream innovation.
Second, establish a dedicated coordinating mechanism. Multi-agency deliberation without a forcing function produces the timelines we’ve witnessed. A blended finance coordination and public-private development finance authority could convene regulators and impose decision deadlines—could compress years of deliberation into months.
Third, pilot targeted structures now. While comprehensive reform proceeds, nothing prevents launching pilot vehicles in priority areas. A Northern and Southern Reconstruction Bond combining government guarantees with private capital. An Arab-sector SME fund using philanthropic first-loss capital to crowd in institutional investors. A cleantech acceleration fund structured around electricity derivatives and offtake agreements. Each pilot would generate practical learning while demonstrating feasibility. The blended platform identified in the Forum’s report would be a good starting point.
Fourth, clarify regulatory treatment of hybrid structures. Vehicles that combine philanthropic, government, and private capital currently navigate uncertain territory across nonprofit restrictions, securities law, and government procurement rules. Safe harbors and clear guidance would dramatically reduce transaction costs for innovative structures.
Fifth, build domestic capacity. Israel has world-class financial engineering talent but limited experience structuring blended finance transactions. Technical assistance partnerships with established impact investing intermediaries, combined with dedicated training programs, would develop the human capital pipeline necessary for sustained activity.
The Stakes
Israel faces simultaneous crises demanding capital: civil and security-related reconstruction, climate transition, social cohesion, and economic development in the northen and southern war-torn regions. Traditional government budgets cannot meet these needs alone. Private capital exists in abundance but requires appropriate risk-mitigation. Philanthropic and development capital stands ready to play a catalytic role, but alone, are unleveraged and not enough.
Blended finance is the architecture that connects these capital sources to urgent needs. The IFIE report helps explain why this matters. What’s needed now is the institutional will on how to build it—not in another twenty years, but in the next twenty-four months. Israel’s development challenges, and the communities bearing the absence of these tools, cannot afford another two decades of inter-ministerial deliberation.
